Age-rating and selection

A consequence is more of them are likely to pay the smaller penalty and take up insurance only when sick. (Let’s call this “gaming,” for short.) But this mechanism is also what keeps premiums sufficiently affordable for the older cohort so fewer of them game it in this way.

Consider the counterfactual of more risk-rating by age. In that case, you’d get less gaming among the young but more for the older cohort.

Which scenario is to be preferred from points of view of selection and welfare?

I’m ignoring the other counterfactual of more redistribution by income. I think that would be better, but I am not optimistic about the political prospects of increasing the progressivity of the tax system. The more likely question to be put on the table is, should the age rating bands be modified? If so, how much cross-subsidization by age is tolerable? How many gaming 60-year-olds would we trade for one less gaming 25-year-old?

When someone is gaming, basically, they pay a fine, and if they need medical care there’s a societal loss (they’ll be using resources without paying for them). With that in mind, if there was one young person and one old, we’d want the young person to game because they’ll need fewer medical services.

However, there are probably many more young people insured in the individual market than older people. Therefore, that might suggest we’d want older people to game instead. I’d need data to make the decision.

It seems obvious to me that more age discrimination is preferable. It would more closely reflect the actuarial price, thus less gaming. It would make insurance less affordable for the older cohort but that could be offset by a correspondingly more discriminatory subsidy, even without increasing the total amount of subsidies. No change in the progressivity of taxes is needed. I’m actually of the option that tax rates should be perfectly flat so that voters are less likely to game the system. A universal tax credit can provide the progressivity you seek.

I was having a similar conversation with Avik Roy via twitter about the age rating bands (3:1) as in ACA vs. changing it to reflect a more accurate community rating with age-specific bands by an individuals birth year.

Sure we’d have more gaming by the elderly in that situation. But the ideal question is, as you put it, how many elderly gamers do we want for each young gamer we’d avoid?

I don’t think it’s possible to answer that in absolute terms, but in general the greater a given population’s perceived odds of losing a gamble, and the greater the projected magnitude of their losses, the less likely they are to assume the risks associated with the said gamble.

Most young people view both the odds of losing this gamble, and the costs of doing so as relatively low. Most older people view the odds of losing the coverage gamble and the costs of doing so as significantly higher.

Even without cross-subsidization, the number of older persons who will *willingly* go without even catastrophic insurance is quite low. They will drop coverage because they can’t pay for it, in contrast to young people who will drop coverage because they don’t *want* to pay for it.

My read is that making insurance dramatically more expensive for young people *and* giving them a mechanism by which they can successfully game the system, the ACA has created a set of incentives that will increase gaming amongst the young significantly more than the absence of cross-subsidization would have compelled seniors to forego coverage.

My bet is that the total premium loss from young-people opting to game the system under the ACA will exceed the actuarial losses that would have been generated by uncompensated care for the old in the absence of cross subsidization.

It’s tempting to compare this state of affairs with what would emerge if we let insurers price according to risk and used wealth+income indexed transfers from the general fund to cover the gap between risk-based premiums and what particular individuals could afford to pay instead.

I am in favor of reducing the amount of adverse selection, and any other gaming activities.
I am also in favor of charging those with health conditions a lower premium than normal (even lower than the 3 to 1 community rating for older participants).
The reason is that those with relatively large claims each year have enough financial and emotional issues to deal with. Providing a signifcant break om premiums is compassionate and just.
In my particular design, which I hope to provide on the exchanges in 2014, it is fully community-rated, so that those age 64 are paying the same cost per thousand as those younger.
All participants, young and old, will have the opportunity of a unique “excepted benefits” plan, which provides increasing paid-up coverage to fill the monthly increasing deductible.
The result is that those with low or no claims have a significant premium reduction by having a larger (and fully paid-for) deductible.
Those with higher claims do not have the benefits of this increasing paid-up coverage due to their claims reducing any paid-up benefits that had accumulated.
But, they do have lower premiums than even the 3 to 1 community rating, for the younger participants , who are accumulating their paid-up deductibles, are paying significantly higher premiums, for 12-24 months, while the older and sicker are also paying the same costs per thousand.
Don Levit

Regardless of my age, I only want to buy health insurance when I am sick. Since I am an optimist, I don’t think I will ever get sick so I don’t ever want to buy insurance. However, if I do get sick, I want to be able to have insurance to cover the outrageous cost.
It seems to me that all of this arguing about age bands and gaming is just fiddling around the margins. We really need universal coverage paid for by a payroll tax. Everybody who is working pays and those who earn more, pay more. Everyone is covered. No gaming. No worry about age groups “cross-subsidizing”. Very transparent. This system seems to work well in the rest of the developed world.
Those who have income pay in proportion to their income. Those who need medical care get it.
Simple.

Do rates of gaming differ between age groups? I would (probably incorrectly) guess that the young are more likely to game because they might not understand the value of insurance whereas the old would be less likely to game because they’re more aware of the risks of going without insurance. If that’s correct, than a 1-to-1 ratio probably isn’t accurate. More like 5-1?

I live in Switzerland, and I’ve never heard of prison time for failing to buy insurance. If you fail to purchase insurance, the Canton selects and purchases a policy on your behalf, and the cost is added to your tax bill.

I guess you could go to prison for not paying taxes, but I don’t know of any examples.

I’m ignoring the other counter factual of more redistribution by income. I think that would be better,

I agree that it would be much better because most people are poorer when they are younger.

Here is my proposal to pay based on income.The state would provide insurance to all Americans but the annual deductible would be equal to the family’s trailing year adjusted income minus the poverty line income (say $25,000 for a family of 4) + $300. So a family of 4 with a trailing year adjusted income of $30,000 would have a deductible of $5,300. A family of 4 with a trailing year adjusted income of $80,000 would have a deductible of $55,300. Middle class and rich people could fill the gap with private supplemental insurance but this should be full taxed. This would encourage the middle class and rich, who are generally capable people, to demand prices from medical providers and might force down costs.

You might be interested in http://www.nber.org/papers/w18089 (“Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange”). It examines age-rating on the Massachusetts exchange and includes a section examining selection.